State Gives Income Tax Breaks to Companies That Pay No Tax

ByWarren Vieth and Mark Lash |May 26, 2016

Some state lawmakers justified their decision to curtail a tax credit for the working poor by declaring that the state shouldn’t be subsidizing people who owe no income taxes in the first place.

But the state has several tax breaks on the books that do essentially the same thing for businesses. Through a combination of direct refunds, rebates and tax credit “transfers,” companies with no income tax liability are receiving cash subsidies.

In some cases, the state pays the money to them directly. In some cases, they get the cash by selling credits they can’t use to taxpayers who can use them.

An Oklahoma Watch analysis shows that subsidies doled out to businesses with no income tax liability easily exceed the $29 million the state has been paying to working families who owe no income taxes.

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Last year, for example, operators of “wind farm” generating plants alone received $45 million in cash refunds. An effort to end those subsidies was rejected by lawmakers.

“We’re paying businesses that are making negative profits,” said University of Oklahoma economics professor Cynthia Rogers, who was recently appointed to serve on a newly created state Incentive Evaluation Commission.

“They have a negative, and we’re offsetting it,” Rogers said. “You could argue that if we don’t want to give refunds, we shouldn’t give them anywhere.”

What Lawmakers Did

Both the House and Senate voted last week to eliminate what is called the “refundable” portion of Oklahoma’s earned income credit, which provides income tax relief to lower-income people who work and have dependent children. Gov. Mary Fallin signed the bill into law on Friday.

The refundable portion of the credit is paid to families with little or no state income tax liability. That means the families receive a cash payment despite the fact that they may owe no income tax. One of the purposes of the credit is to partially offset what low-income families pay in other state taxes, including the sales tax.

The decision to repeal the refundable share will end cash refunds averaging $147 a year for about 200,000 households across the state. It will save the state an estimated $29 million, which will be used to reduce spending cuts elsewhere in the budget. Gov. Mary Fallin signed the bill into law on Friday. Some advocacy groups urged Gov. Mary Fallin to veto the bill, but she signed it into law on Friday.

Several lawmakers who voted to scale back the earned income credit said it made no sense to them for the state to pay refunds to taxpayers who owed no taxes.

“We’re not eliminating it but making it not refundable,” House Speaker Jeff Hickman told the editorial board of The Oklahoman newspaper. “Why should you get back more than what you paid in taxes?”

Yet that’s essentially what some businesses have been doing for decades, through a variety of state tax refunds, rebates and transfers. Although lawmakers have scaled back some of them, others remain on the books and have politically powerful constituencies supporting them.

Wind and Coal Refunds

At least two state business incentives provide cash refunds to companies that owe no state income taxes because their year-end tax returns don’t show a profit.

The biggest one is for electricity generated by wind-power installations. Before 2014, qualifying companies received transferable credits they could sell to other taxpayers if they had no state income tax liability, which is often the case. The buyers were other companies, individuals and brokers who purchase and resell the credits.

From 2014 forward, the tax credit became refundable instead of transferable. Credits earned after January 2014 can be returned to the state if companies have no tax liability. The state then sends them a check equal to 85 percent of the credits earned.

According to the Oklahoma Tax Commission, companies earned $59 million in credits for the 2014 tax year. They returned $53 million of those credits, and the state paid them $45 million in refunds.

“No doubt a lot of taxpayers would agree that individuals shouldn’t get back more than they pay in,” State Treasurer Ken Miller told Oklahoma Watch.

“But I bet they’d also agree that the wind power industry shouldn’t get back more than the zero dollars they pay into the state Treasury. It is unfortunate the same principle didn’t apply to the wind industry.”

The state issues similar refundable credits to operators of Oklahoma coal mines and companies that purchase their coal for electricity generation or other uses. Companies earned $6 million in credits for the 2014 tax year and used $4 million of them. It could not be immediately determined how much of the $4 million was paid out in refunds and how much was used to offset state tax liability.

Historic Buildings and Energy-Efficient Homes

Several business tax credits are freely transferable to other taxpayers. That allows a company that owes no state income taxes to sell any credits it earns to someone else for cash, often at a discount of 15 percent to 25 percent of face value.

One of those credits subsidizes the rehabilitation of buildings certified as historic structures by the federal government, which provides its own tax credit to qualifying developers. It was used, for example, to renovate Tulsa’s Mayo Hotel and Oklahoma City’s Skirvin Hotel.

Oklahoma Tax Commission data show that holders of historic preservation credits exercised $6 million of them for the 2014 tax year. It could not be immediately determined how much of the $6 million in credits were still held by the developers who initially received them. But advocates of the credits have acknowledged that they typically are sold to other people who have enough tax liability to use them.

Another transferable credit goes to builders of new homes with energy-saving features that make them more efficient than homes that simply meet code standards. It applies to residences of up to 2,000 square feet, and was intended to reduce energy consumption in homes generally purchased by lower-income families.

For the 2014 tax year, holders of energy-efficiency credits exercised $7 million of them. It could not be immediately determined how many of those credits had been sold to other taxpayers by developers with no tax liability.

One of the buyers was Halliburton, the big oilfield services firm. According to Oklahoma Tax Commission data, it acquired $800,000 in energy-efficiency credits in 2014.

Transferable Credit Marketplace

Some transferable credits have been curtailed and some transformed into refundable credits. But many previously-earned credits are still in circulation and can be exercised for years to come.

Before the wind power credit was made refundable, Apple Inc. and Kraft Foods Group Inc. were among the big purchasers of Oklahoma wind credits. Tax Commission data show that during 2012 and 2013, Apple bought $6 million of them to reduce its Oklahoma income tax liability. Kraft acquired $4 million of the credits in 2012.

Transfers of Wind Power Credits to Apple

Here is a list of transfers of wind power credits to Apple Inc. in 2012 and 2013.

From

To

Amount

Blackwell Wind LLC

Apple

$316,966

Elk City II Wind LLC

Apple

$1,136,945

Elk City Wind LLC

Apple

$353,658

FPL Energy Cowboy Wind LLC

Apple

$66,921

FPL Energy Cowboy Wind LLC

Apple

$303,429

FPL Energy Oklahoma Wind LLC

Apple

$254,974

FPL Energy Sooner Wind LLC

Apple

$66,000

FPL Sooner Oklahoma Wind LLC

Apple

$253,733

Minco Wind II LLC

Apple

$303,480

Minco Wind III LLC

Apple

$515,495

Minco Wind LLC

Apple

$314,565

Minco Wind LLC

Apple

$1,363,055

Oklahoma Wind LLC

Apple

$62,815

Source: Analysis of Oklahoma Tax Commission data by Mark Lash.

In some cases, refundable credits change hands many times.

In 2014, Tax Commission data shows that HPP Ambassador OKC LLC transferred $2.1 million in historic preservation credits to Commerce Bank. Commerce, in turn, parceled out the credits to six insurance companies and one individual, Scott Thomas.

Two years earlier, Garrison Development Co. of Kansas City transferred $1.2 million in Oklahoma historic preservation credits to Downtown Muskogee Housing Partners. The credits then changed hands three more times, eventually winding up with Shelter Mutual Insurance Co. and Shelter Life Insurance Co.

Garrison received the credits for two rehabilitation projects in Muskogee. It redeveloped a downtown building built in 1910 into Surety Apartments, a senior apartment complex. It then did the same thing with the nearby 10-story Manhattan Building.

Besides doing its own renovation and construction work, Garrison Development’s parent company has a subsidiary called Garrison Equities that specializes in selling credits to people who can use them to reduce their federal and state tax liabilities.

“The investor receives a flow of tax credits from Garrison Equities at a discount; for example, an investor will pay $0.85 for every $1.00 of tax credit received,” the company says on its website. “In addition, investors receive the benefits of the depreciation and interest expense deductions which flow from the property.”

There are enough transferable credits still in circulation to support an Oklahoma-based niche industry of credit brokers, such as Tax Credit Exchange LLC in Oklahoma City.

Transfers of Historic Rehabilitation Tax Credits

Here are two examples of multiple transfers of historic rehabilitation tax credits, the first in 2012 and the second in 2014.

From

To

Amount

Garrison Development Co.

Downtown Muskogee Housing Partners

$1,193,302

Downtown Muskogee Housing Partners

Manhattan Housing Venture LLC

$1,193,302

Manhattan Housing Venture LLC

Commerce Bank

$1,193,302

Commerce Bank

Shelter Mutual Insurance

$1,133,302

Shelter Life Insurance

60,000

From

To

Amount

HPP Ambassador OKC LLC

Commerce Bank

$2,078,877

Commerce Bank

Shelter Mutual Insurance

$865,683

Country Life Insurance

$25,000

Country Preferred Insurance

$75,000

Country Mutual Insurance

$150,000

Columbia Mutual Insurance

$70,000

Columbia National Insurance

$130,000

Scott Thomas

$513,194

Quality Jobs Rebates and Credit Carryovers

The state also provides other forms of subsidies to companies that have no income tax liability.

One of the biggest is the Quality Jobs program, which paid out $89 million in cash rebates during the 2015 fiscal year to companies that satisfied its criteria for creating new employment in Oklahoma.

Quality Jobs rebates are provided to firms regardless of their income tax liability. Although it could not be determined how much of the $89 million went to companies with no income taxes to pay, previous Oklahoma Watch reporting has shown that some recipients are business start-ups that remain unprofitable for several years.

In addition, the state allows companies that receive other business tax credits to hold them for future use if they have no taxable income during the year in which they were earned.

For example, companies that receive “Investment/New Jobs” tax credits for capitalizing job-creating projects can exercise their credits for as long as 20 years if they have no immediate tax liability and if the new employment is maintained. Those credits reduced state revenue by an average of $57 million per year over the last three years, state data show.

Another Perspective

Despite the similarities between the earned income credit refunds and the subsidies provided by some business credits, one tax policy analyst said he was wary of drawing a direct analogy.

“They’re not really comparable,” said David Blatt, executive director of the Oklahoma Policy Institute. The Tulsa-based research group strongly opposed elimination of the refundable credit for the working poor and was among those urging the governor and lawmakers to reject the budget package that includes it.

“A business credit is supposed to be an incentive to invest or create jobs,” Blatt said. “The EITC is to offset other taxes and to provide an incentive to reward work.”

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